Toyo Seikan Group Holdings, Ltd. Investor s Guide 2016 For the year ended March 31, 2016

Transcription

1 Toyo Seikan Group Holdings, Ltd. Investor s Guide 2016 For the year ended March 31, 2016

2 Profile The Toyo Seikan Group is a comprehensive manufacturer of packaging containers, which comprises Toyo Seikan Group Holdings, Ltd. (the Company ), 83 subsidiaries (66 consolidated and 17 non-consolidated) and 12 associates. Its major business operations consist of the Packaging business, which involves the manufacturing and sales of containers using metals, plastics, glass or paper as the main raw materials, contract manufacturing and sales of aerosol and general filling products and manufacturing and sales of packaging container-related machinery and equipment; the Steel plate related business, which involves the manufacturing and sales of steel plates and related processed goods; the Functional materials related business, which involves the manufacturing and sales of functional materials such as aluminum substrates for magnetic disks, functional films for optics, glaze, trace-element fertilizer, pigment and gel coat, etc.; and the Real estate related business, which involves the rental/lease of office buildings and commercial facilities, etc. The Group also engages in the manufacturing and sales of hard alloys, machinery and appliances, and raw material products for agriculture and stamping dies for automobile parts, sales of petroleum products and non-life insurance agency business. History Month / Year Jun Mar Sep Sep Apr Jul Feb Jul Feb Jun May 1949 Apr Jan Oct Jun Apr Aug Apr Jul Apr Oct Apr May 1974 Sep Apr Apr Oct Jan Apr Jan Mar Apr Oct Aug Oct Dec Jan Apr Major Events Toyo Seikan founded and its head office and Osaka Plant established Automatic can making machine installed and started operations Tokyo Plant established Tobata Plant established Toyo Kohan Co., Ltd. founded for manufacturing steel sheets Toyo Seikan listed on the Osaka Securities Exchange Shimizu Plant established 7 can manufacturers merged at the government s request to form Toyo Seikan Kaisha, Ltd. (the current Toyo Seikan Group Holdings, Ltd.) Tokan Chemical Industry Co., Ltd. (current Tokan Kogyo Co., Ltd.) founded Head office relocated to Chiyoda-ku, Tokyo Toyo Seikan listed on the Tokyo Stock Exchange Toyo Kohan Co., Ltd. listed on the Tokyo Stock Exchange and the Osaka Securities Exchange Tokan Chemical Industry Co., Ltd. changed its name to Tokan Kogyo Co., Ltd. Shimada Glass Co., Ltd. (current Toyo Glass Co., Ltd.) joined the Toyo Seikan Group Shimada Glass Co., Ltd. changed its name to Toyo Glass Co., Ltd. Sendai Plant established Ibaraki Plant established Yokohama Plant established Kawasaki Plant established Toyo Glass Co., Ltd. changed its Japanese name (the word Glass was spelled in katakana but English name unchanged) Saitama Plant and Takatsuki Plant established Chitose Plant established Hiroshima Plant established Osaka Plant relocated to Izumisano City Kiyama Plant established Ishioka Plant established Kuki Plant established New head office building (Saiwai Building) completed Sendai Plant relocated from Saiwai-cho, Miyagino-ku, Sendai City to Minato, Miyagino-ku, Sendai City Toyohashi Plant established Shizuoka Plant established Tokyo Plant closed and integrated into Yokohama Plant Tobata Plant integrated into Kiyama Plant Shiga Plant established Takatsuki Plant integrated into Shiga Plant Shimizu Plant integrated into Shizuoka Plant New head office building (Osaki Forest Building) completed Head office relocated to Shinagawa-ku, Tokyo Transferred to a holding company structure and company name changed to Toyo Seikan Group Holdings, Ltd. Toyo Seikan Spin-off Preparation Co., Ltd., succeeded all businesses except for the Company s operations of the Group management and administration through an absorption-type company split, and trade name was changed to Toyo Seikan Co., Ltd.

3 Table of Contents Contents Page Consolidated Financial Highlights 2 Non-consolidated Financial Highlights 3 Message from the President 4 Management s Discussion and Analysis of Financial Condition and Results of Operations 5 Mid-Term Management Plan 9 Dividend Policy 10 Risk Factors 11 Corporate Governance 14 Principal Shareholders 28 Board of Directors, Audit and Supervisory Board Members and Senior Executive/Executive/Operating Officers 30 Consolidated Financial Summary 32 Consolidated Balance Sheet 34 Consolidated Statement of Income and Consolidated Statement of Comprehensive Income 37 Consolidated Statement of Changes in Equity 40 Consolidated Statement of Cash Flows 42 Consolidated Segment Information 44 Basis for Presenting the Consolidated Financial Statements 47 Non-consolidated Balance Sheet 52 Non-consolidated Statement of Income 55 Corporate Information 56 Disclaimer: Please note that the consolidated financial statements presented in English are a translated summary of the audited consolidated financial statements presented in Japanese. The translation of the consolidated financial statements and the related information has NOT been audited by Sohken Audit Corporation, the Company s accounting auditor. The Company provides this translation for reference and convenience purposes only, without any warranty as to its accuracy or otherwise. In the event of any discrepancy between the translation and the Japanese original, the latter shall prevail. In no event shall the Company be liable for damages of any nature, including but not limited to, direct, indirect, special, punitive, consequential or incidental damages arising from or in connection with this translation. The final decision and responsibility for investments rests solely with the reader of this document. Forward-Looking Statements: Statements made in this Investor s Guide with respect to the Company s current plans, estimates, strategies and beliefs and other statements that are not historical facts are forward-looking statements about the future performance of the Company. Forward-looking statements include, but are not limited to, those statements using such words as believe, expect, plans, strategy, prospects, forecast, estimate, project, anticipate, aim, may or might and words of similar meaning in connection with a discussion of future operations, financial performance, events or conditions. From time to time, oral or written forward-looking statements may also be included in other materials released to the public. These statements are based on management s assumptions and beliefs in light of the information currently available to it. The Company cautions you that a number of important risks and uncertainties could cause actual results to differ materially from those discussed in the forward-looking statements, and therefore the reader should not place undue reliance on them. The reader also should not oblige the Company to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The Company disclaims any such obligation. Risks and uncertainties that might affect the Company include, but are not limited to, (1) Fluctuations in economic conditions, (2) Change in prices of raw materials and energy, (3) Intensification of price competition, (4) Weather and natural disasters, (5) Research and development, (6) Merger and acquisitions, (7) Investment in plant and equipment, (8) Customer complaints about quality, (9) Environmental issues, (10) Compliance, (11) Country risk, (12) Customer credit risk, (13) Information security, (14) Training and development of human resources, (15) Retirement benefits liability, (16) Deferred tax assets, (17) Accounting for asset impairment, (18) Change in accounting standard and tax system, etc., (19) Hostile takeover, (20) Fluctuation in the value of assets, (21) Risk of litigation. Risks and uncertainties also include the impact of any future events with materially adverse impacts

4 Consolidated Financial Highlights (For the years ended March 31, 2015 and 2016) 1. Consolidated Performance (1) Consolidated financial results: / (percentage (thousands of (millions of yen) change) U.S. dollars) Net sales 784, , % $7,117,927 Operating income 15,080 32, % 287,070 Ordinary income 23,851 26, % 236,590 Profit (loss) attributable to owners of parent 3,604 10, % 88,987 Net income per share (yen) Net income per share (diluted) (yen) - - Return on equity (ROE) 0.6% 1.6% Return on assets (ROA) 2.2% 2.3% Operating income to net sales 1.9% 4.0% (2) Consolidated financial condition: Total assets 1,137,899 1,150,667 10,211,812 Net assets 710, ,189 6,249,459 Equity ratio 56.4% 55.2% Net assets per share (yen) 3, , (3) Consolidated cash flows: Cash flows from operating activities 49,486 58, ,657 Cash flows from investing activities (53,652) (45,666) (405,271) Cash flows from financing activities 19,179 9,522 84,505 Cash and cash equivalents at end of period 145, ,026 $1,473, Dividends Q1 Q2 Q3 Q4 Year Total dividends Payout ratio (Consolidated) Dividend on equity ratio (Consolidated) (yen) (millions of yen) (%) (%) , % 0.5% , % 0.4% 2017 (Forecast) % Notes: 1. U.S. dollar amounts are translated from Japanese yen, for readers convenience only, at the exchange rate of yen per U.S. dollar, the TTM of The Bank of Tokyo-Mitsubishi UFJ, Ltd. on March 31, Return on equity (ROE) = Net income / Average shareholders equity 3. Return on assets (ROA) = Ordinary income / Average total assets - 2 -

5 Non-consolidated Financial Highlights (For the years ended March 31, 2015 and 2016) Non-consolidated Operating Results (1) Non-consolidated operating results: / (percentage (thousands of (millions of yen) change) U.S. dollars) Net sales 16,054 15,891 (1.0%) $141,028 Operating income 4,677 3,776 (19.3%) 33,511 Ordinary income 13,756 4,959 (63.9%) 44,010 Net income 11,870 3,947 (66.7%) 35,028 Net income per share (yen) Net income per share (diluted) (yen) - - (2) Non-consolidated financial condition: Total assets 615, ,838 5,633,990 Net assets 421, ,075 $3,701,411 Equity ratio Net assets per share (yen) 2, , Note: U.S. dollar amounts are translated from Japanese yen, for readers convenience only, at the exchange rate of yen per U.S. dollar, the TTM of The Bank of Tokyo-Mitsubishi UFJ, Ltd. on March 31,

6 Message from the President Takao Nakai President Career Summary Apr Joined the Company Jun General Manager, Material Procurement Department Jun Head of Material Procurement Department, Material Procurement & Environment Division Jun Director Jun Operating Officer, Head of International Division Jun Executive Officer Apr Senior Executive Officer in charge of International Operations, Marketing and Procurement Jun Executive Vice President and Director Assistant to President Jun President and Representative Director (up to present) Chairman of Group CSR Promotion Committee (up to present) Jun Chairman of Group Compliance Promotion Committee (up to present) Chairman of Group Environment Committee (up to present) Since its establishment in 1917, the Toyo Seikan Group has been striving to offer top quality and highly functional products in a safe, affordable and speedy manner by leveraging the properties of materials such as metals, plastics, glass and paper. Toyo Seikan Group Holdings, Ltd. transitioned to a holding company system as of April 1, 2013 to flexibly respond to the changing business environment surrounding the Group and to strengthen its competitiveness for sustainable growth. We will promote agile and efficient business operations by clearly defining the management strategy and goals for the entire Group, while ensuring optimal utilization and allocation of its management resources. The Group is committed to contributing to the happiness and prosperity of mankind through packaging technology, its social mission and responsibility with people and technology as core management values. We will enhance the Group s corporate value by accelerating further collaboration within the Group, improving the profitability in existing domestic businesses and promoting strategic investments in overseas and new businesses with high growth potential. We appreciate your continued support and encouragement in the future. Takao Nakai President - 4 -

7 Management s Discussion and Analysis of Financial Condition and Results of Operations 1. Business Overview of the Group (1) Progress and Results of Operations In the consolidated fiscal year ended March 31, 2016, Japan s economy continued to recover gradually on the back of improvements in corporate profits and the employment and income environment. This occurred despite signs of weakness in exports and manufacturing activity resulting from a slowdown in the economies of China and other emerging markets, as well as a temporary standstill in the consumer spending rally. Given such circumstances, the Toyo Seikan Group s operating performance for the consolidated fiscal year under review is as described below. Net sales increased to 802,048 million yen (a year-on-year increase of 2.3%), primarily due to an increase in sales of beverage-filling facilities and beverage containers, as well as the effect of the yen depreciation. On the profit front, operating income increased to 32,347 million yen (a year-on-year increase of 114.5%), due to higher net sales as well as the impact of Group-wide cost-cutting and raw material and energy prices below the previous fiscal year s levels as a result of lower crude oil prices. Ordinary income also increased to 26,659 million yen (a year-on-year increase of 11.8%), due to the reporting of foreign exchange losses related to foreign-currency-denominated receivables and payables such as the foreign-currency-denominated loans receivable to overseas subsidiaries. Consequently, the Group s profit attributable to owners of parent amounted to 10,027 million yen (a year-on-year increase of 178.2%) for the consolidated fiscal year under review. This increase was mainly attributable to a decrease in tax expense despite the reporting of provision for business structure expenses. Effective from the consolidated fiscal year under review, the Company has adopted the Accounting Standard for Business Combinations (ASBJ Statement No. 21, September 13, 2013), and the presentation of Net income was changed to Profit attributable to owners of parent. The overall business situation for each segment was as follows: [Packaging business] Segment net sales increased 2.8% from the previous fiscal year to 683,698 million yen, and operating income was 24,620 million yen (a year-on-year increase of 350.5%). 1) Manufacturing and sales of metal packaging Sales of metal packaging products remained flat year on year. <Domestic> Although sales of cans for beer and chuhai (shochu-based beverage) increased and sales of closures for soft drink bottles also increased, sales of cans for soft drinks, particularly coffee drinks, remained sluggish and sales of cans for food and daily supplies such as containers for processed vegetables declined. As a result, domestic sales remained flat year on year. <Overseas> Sales of cans for beverages such as nutritional drinks increased in Thailand, and the yen depreciation also made a contribution. As a result, overseas sales significantly surpassed the previous fiscal year s results. 2) Manufacturing and sales of plastic packaging Sales of plastic packaging products increased year on year. <Domestic> Sales of refill pouches for laundry detergent decreased, and sales of PET beverage bottles for carbonated soft drinks and fruit juice beverages remained sluggish. However, sales of cups for yogurt increased, and sales of plastic closures for soft drink bottles and bottles for laundry detergent were solid. As a result, domestic sales remained flat year on year. <Overseas> Sales of PET beverage bottles were sluggish in Thailand due to a decrease in contract filling of bottles for coffee, but the yen depreciation had a positive impact, resulting in higher - 5 -

8 overseas sales than in the previous fiscal year. 3) Manufacturing and sales of glass packaging Sales of glass packaging products increased from the previous fiscal year due to the growth in sales of bottle products for beer and soft drinks. 4) Manufacturing and sales of paper products Sales of paper products increased year on year due to favorable growth in sales of paper cups for coffee, which are mainly used at convenience stores. 5) Contract manufacturing and sales of aerosol products and general filling products Sales of aerosol products increased year on year, reflecting an increase in sales of general filling products such as hair care products as well as favorable sales of aerosol products such as waterproofing sprays and insecticides. 6) Manufacturing and sales of machinery and equipment related to packaging containers Sales of machinery and equipment related to packaging containers increased considerably year on year. Despite poor sales in the U.S. of can and can-end manufacturing machinery destined for the Middle East, a growth in sales of beverage-filling equipment in Japan and yen depreciation contributed to this increase. [Steel plate related business] Segment net sales decreased 7.1% from the previous fiscal year to 54,447 million yen with operating income of 1,187million yen (a year-on-year decrease of 51.4%). Sales of materials for electrical and electronic components decreased from the previous fiscal year, due to poor sales of battery materials, such as for dry-cell batteries. Sales of materials for automobile and industrial machinery parts decreased from the previous fiscal year due to lower sales of gasket materials. Sales of construction materials and household electric appliances decreased over the previous fiscal year due to a decline in sales of interior materials for unit baths and exterior materials for residences and buildings. [Functional materials related business] Segment net sales decreased 2.9% from the previous fiscal year to 38,431 million yen with operating income of 3,279 million yen (a year-on-year decrease of 21.6%). Sales of aluminum substrates for magnetic disks increased from the previous fiscal year due to yen depreciation despite a fall in productivity, which was caused by the increased quality requirements of customers. Sales of functional films for optics decreased from the previous fiscal year. Meanwhile, sales of pigments decreased due to falling demand. [Real estate related business] Segment net sales increased 14.7% from the previous fiscal year to 6,966 million yen with operating income of 4,184 million yen (a year-on-year increase of 18.5%), which resulted from the rental/lease of office buildings and commercial facilities. [Other businesses] This segment includes 1) the manufacturing and sales of hard alloys, machinery and appliances, and raw material products for agriculture; 2) sales of petroleum products; and 3) the non-life insurance agency business. The acquisition of FUJI TECHNICA & MIYAZU INC. as a consolidated subsidiary in the fourth quarter contributed to an increase in the sales of automobile stamping dies. As a result, segment net sales increased 24.1% from the previous fiscal year to 18,503 million yen with operating income of 1,166 million yen (a year-on-year increase of 23.5%)

9 2. Analysis of Financial Position, Operating Results and Cash Flow (1) Analysis of financial position Total assets at the end of the consolidated fiscal year under review (hereinafter current fiscal year ) increased 12,768 million yen to 1,150,667 million yen from the end of the previous consolidated fiscal year (hereinafter previous fiscal year ).This increase was mainly due to an increase in cash and cash equivalent, and electronically recorded monetary claims-operating. Net assets decreased to 704,189 million yen, down 6,558 million yen, mainly reflecting such factors as a decrease in valuation difference on available-for-sale securities due to a fall in the fair market values in the stock market and a decrease in the remeasurements of defined benefit plans. (2) Analysis of operating results The Toyo Seikan Group s net sales for the current fiscal year increased 17,686 million yen to 802,048 million yen. This increase was mainly due to increased sales of beverage-filling facilities and beverage containers, as well as the effect of the yen depreciation. Gross profit increased 20,036 million yen from the previous fiscal year to 119,266 million yen due to a decrease in cost of sales of 2,350 million yen, mainly reflecting such factors as higher net sales as well as the impact of Group-wide cost-cutting and raw material and energy prices below the previous fiscal year s levels as a result of lower oil prices. Operating income increased 17,267 million yen from the previous fiscal year to 32,347 million yen, which was mainly due to an increase in selling, general and administrative expenses of 2,769 million yen. As a result, the operating income margin was 4.0%. The net amount derived by deducting non-operating expenses from non-operating income decreased 14,459 million yen from the previous fiscal year to minus 5,687 million yen. Non-operating income for the current fiscal year decreased due to the reporting of foreign exchange losses related to foreign-currency-denominated receivables and payables such as the foreign-currency-denominated loans receivable to overseas subsidiaries. As a result, ordinary income totalled 26,659 million yen, up 2,808 million yen from the previous fiscal year, with an ordinary income margin of 3.3%. The Group also posted extraordinary losses consisting of a provision for business structure expenses of 6,842 million yen and a provision for business structure reform of 1,306 million yen following the business restructuring of domestic consolidated subsidiaries. Income before income taxes and minority interests decreased 495 million yen from the previous fiscal year to 18,510 million yen, due to lower extraordinary income than the previous fiscal year despite an increase in ordinary income. Tax expenses, which are the total amount of income taxes-current and income taxes-deferred, amounted to 6,335 million yen, down 6,502 million yen from the previous fiscal year. This was mainly due to a decrease in taxable income following the completion of liquidation of overseas consolidated subsidiaries. Consequently, profit in the current fiscal year was 12,174 million yen, and profit attributable to owners of parent, which was net of profit attributable to non-controlling interest, was 10,027 million yen, up 6,422 million yen from the previous fiscal year, resulting in the net income margin of 1.3%. (3) Cash flow Cash and cash equivalents (hereinafter cash ) on a consolidated basis increased 20,744 million yen (a year-on-year increase of 14.3%) to 166,026 million yen at the end of the current fiscal year. Cash flows from operating activities Net cash from operating activities for the current fiscal year was 58, 893 million yen (a year-on-year increase of 19.0%). This increase was attributable to such factors as income before income taxes and minority interests of 18,510 million yen, depreciation of 45,483 million yen and income taxes paid of 7,194 million yen

10 Cash flows from investing activities Net cash from investing activities was 45,666 million yen (a year-on-year decrease of 14.9%). This decrease was mainly attributable to purchases of property, plant and equipment of 35,831 million yen for the purpose of capital investment in the packaging business, and purchase of shares of consolidated subsidiaries resulting from change of scope of consolidation. Cash flows from financing activities Net cash from financing activities was 9,522 million yen (a year-on-year decrease of 50.3%). This decrease was mainly attributable to proceeds from long-term loans payable of 19,800 million yen, repayments of long-term loans payable of 7,420 million yen and cash dividends paid of 2,840 million yen. (4) Information concerning capital resources and liquidity of funds 1) Major financing needs and capital resources The Toyo Seikan Group has financing needs mainly for raw material costs for manufacturing activities, labor costs, overhead expenses, operating expenses including selling, general and administrative expenses, as well as for investments related to the installation of new equipment and repairs. In addition, we will positively consider investment, including M&As, in new business fields and overseas business to secure new revenue sources and improve the Group s corporate value. The Group intends to use cash flows from operating activities and other funds on hand, and procure funds through loans from financial institutions and issuance of bonds to meet these financing needs. 2) Liquidity of funds As for working capital on hand, the efficiency of funds operations is improved by consolidating the excess funds incurred at respective companies and such management to the Company with the implementation of cash management service (CMS) at the Company and several domestic consolidated subsidiaries. To address any unexpected demand for funds that might cause liquidity risk, we have concluded a commitment line agreement to ensure prompt and accurate funding

11 Mid-Term Management Plan Toyo Seikan Group has transferred to a holding company system in April 2013 to strengthen group collaboration, established Growing 2022, the Group s future vision for growth, to grow into a global company that develops peripheral businesses centered on packaging operations, and formulated and implemented Toyo Seikan Group Third Mid-Term Management Plan for FY2013-FY2015. During the three years covered under the Third Mid-Term Management Plan, the Company could set the foundation for future growth such as posting higher sales from Stolle Machinery Company, LLC and increasing overseas business bases. In particular, in FY2015, the final year of the Plan, we could achieve the income target defined in the Plan due to factors including sales growth and lower manufacturing cost in response to falling material and energy prices. However, we are in the midst of profit improvement in the domestic container packaging business, the mainstay business of Toyo Seikan Group, and are also aware that further restructuring is needed. Based on the issues remaining from the previous Mid-Term Management Plan, the Company has established the following basic policy by redefining the Fourth Mid-Term Management Plan as the phase for solidifying the foundation for growth to achieve Growing An overview of the Plan is provided below. Basic Policy Define and promote Group strategies under the holding company system Further restructure the existing businesses mainly focusing on the domestic packaging segments Expand business areas in the value chain focusing on packaging containers Enhance the soundness of assets and finances in preparation for future growth investment Outline of Basic Strategy <CSR-Based Management> The Group s vision for group CSR management is to contribute to bringing happiness and prosperity to mankind through its sincere and fair business activities. Under this management philosophy, we will continue establishing Toyo Seikan Group as a brand that is trusted by people around the world while communicating with all stakeholders. <Group s Management Structure> While strategically making business decisions and promoting collaboration among group companies under the holding company system, we will enhance the soundness of assets and finances in preparation for future growth. <Existing Business in Japan> While keep creating new values to gain customer loyalty, we will further streamline and automate the Group s production system, further improve profitability by partnering with third parties, and establish a sustainable profit structure. <Overseas Business> While striving to stabilize the earnings of recently established overseas subsidiaries, we will develop and implement appropriate decisions on overseas businesses based on strategies by specific businesses and regions. <Growth Strategy> We will utilize the Group s technologies to expand businesses peripheral to core segments such as machinery/equipment engineering business that incorporates both the technologies of equipment manufacturing and container production, and strive for constant growth of new businesses such as life science, medical care and electricity/electronics, information and communication and energy on which our R&D efforts are focused. Although the business environment surrounding the Group is expected to be more severe, we aim to achieve further growth by steadily implementing various measures under the Toyo Seikan Fourth Mid-Term Management Plan

12 Dividend Policy By improving business performance of the Toyo Seikan Group, the Company has been continuing its efforts to steadily increase returns to shareholders and share profits. The Company s policy on returns to shareholders or distribution of earnings to shareholders is as follows: a. Pay dividends to shareholders in a stable and sustainable manner, based on a consolidated payout ratio of 20% or higher b. Apply retained earnings to growing areas from the medium and long term perspectives while maintaining financial stability c. Flexibly purchase treasury shares in response to stock market conditions and financial circumstances The Company has a basic policy to pay dividends to shareholders twice a year (interim dividend and year-end dividend). Payment of dividends and their value are determined by the Board of Directors of the Company for the interim dividend, and at the General Meeting of Shareholders for the year-end dividend. Under the Articles of Incorporation, the Company can, based on a resolution by the Board of Directors, make an interim dividend payment with the record date of September 30 of each year. Appropriation of surplus for the fiscal year under review is as below. Resolution date Total dividend amount (millions of yen) Dividend per share (yen) Board of Directors Meeting on October 30, , Ordinary General Meeting of Shareholders on June 28, ,

13 Risk Factors The following are risk factors that may adversely affect the business performance, financial position and management of the Toyo Seikan Group. There are also other risks that are inherent in the operations of the Toyo Seikan Group. Those risks mentioned in this document are risks in the future that have been identified by the Group as of the end of the current fiscal year. (1) Fluctuations in economic conditions There is concern that the global and domestic economies could contract or stagnate, leading to sluggish consumer spending and exchange fluctuations, which may adversely affect sales and profit. (2) Change in prices of raw materials and energy Fluctuations in the prices of raw materials such as metals, plastics, glass and paper, which are primarily used in products manufactured and sold by the Toyo Seikan Group, and in energy costs could affect the business performance and profitability of the Toyo Seikan Group. Although the Toyo Seikan Group will pass on higher raw material costs, when applicable, to customers in the form of higher product prices, the profitability of the Group may be adversely affected depending on the extent of price increases as well as the Group s ability to share costs. (3) Intense price competition With continued price competition with competitors in the packaging container market where the Toyo Seikan Group mainly operates, and with an increasing number of corporate customers internally manufacturing their containers, pressure on prices may not only weaken our bargaining power but also increase downward pressure. (4) Weather and natural disasters Weather during the critical demand period can have a significant effect on the business performance given the nature of the Group s mainstay beverage containers operations. For example, unpredictable weather conditions such as a cool summer or an extended rainy season during a peak demand period in the first half of the year, or unforeseen natural disasters can dampen demand, and may have a significant impact on the business performance and financial position of the Group. A large-scale natural disaster, such as an earthquake or typhoon, causing serious damage to the production facilities of the Toyo Seikan Group, would unfavorably affect the Group s business performance and financial position. (5) Research and development To remain at the forefront of technology, it is essential for the Toyo Seikan Group to make continuous and effective investments in R&D activities. However, such outcome is uncertain and higher R&D investments will not guarantee desired results. Specifically, the Group s future growth and profitability may be affected unless a projected return is generated from the investments in new products or technologies. (6) Merger and acquisitions/capital participation The Toyo Seikan Group proactively seeks opportunities for merger and acquisitions and capital participation with an eye to strengthening its operating base and expanding business. However, the Group s business performance and profitability may be adversely affected unless expected results could be achieved

14 (7) Investment in plant and equipment The Toyo Seikan Group continues to make proactive and effective capital investments in manufacturing, sales and R&D to further improve its corporate value. In the event such investments do not yield the anticipated results, it may become difficult to formulate the Group s future strategy and may lead to lower profitability. (8) Customer complaints about quality Although the Toyo Seikan Group manufactures and sells a diversity of products based on strict quality controls, there is no guarantee that all products are totally free of defects, do not cause customer complaints, or do not give rise to product liability. Such an unexpected large-scale quality or product liability issue could result in excessive expenditures, in addition to imparing the credibility or reputation of the Toyo Seikan Group. (9) Environmental issues The Toyo Seikan Group has taken initiatives to reduce the impact that manufacturing processes have on the environment at an increase in costs. However, such initiatives may increase manufacturing cost and there is a possibility that Toyo Seikan Group s business activities could cause an unexpected environmental issue at immense cost as well as impair the credibility or reputation of the Group. (10) Compliance With growing emphasis on corporate social responsibility in recent years, companies are required to ensure that all business activities are undertaken in full compliance with rules and regulations and improve business performance through an effective and appropriate use of management resources while avoiding management risks. To achieve this goal, the Toyo Seikan Group recognizes the enhancement of compliance system as a key management issue, and has focused the Group s efforts toward this. Despite these efforts, it is possible that management may not completely address all possible risks in which case, corporate social responsibility could be brought into question with subsequent damage to the credibility or reputation of the Group. (11) Country risk As the Toyo Seikan Group is expanding its global business, mainly in Asia and Europe, we face risks such as terrorism, political upheaval, fluctuation in economic conditions and exchange rates or unexpected changes in laws and regulations that could affect the business performance of the Group. (12) Customer credit risk In any probable risk of default by a corporate customer due to its uncertain credibility, the Group would write off unanticipated bad debt or set aside additional reserves which may affect the business performance and financial position of the Group. (13) Information security The Toyo Seikan Group has implemented various measures to protect personal information and information obtained in the course of business. However, due to unforeseen circumstances there is no absolute guarantee that such information would not be leaked. In such event, the credibility or reputation of the Group could be impaired and its business performance, among others, could be adversely affected. (14) Training and development of human resources The future continuous growth and development of the Toyo Seikan Group highly depends on the availability of capable and talented managers so it is essential that we hire and develop such personnel. Unless we can hire, retain and develop qualified personnel, the future growth of the Toyo Seikan Group may be adversely affected

15 (15) Retirement benefits liability Retirement benefit costs and liabilities of the Group employees are calculated based on actuarial assumptions such as discount rates, and expected return on pension assets. In the event the actual results differ from these assumptions or the assumptions could change, the future costs or liabilities may be affected. If long-term interest rates are lower than expected or pension assets do not yield the expected return, the profitability and business performance of the Toyo Seikan Group may be adversely affected. (16) Deferred tax assets The Toyo Seikan Group records deferred tax assets for deductible temporary differences. Deferred tax assets are recorded in consideration of recoverability based on projected future taxable income, etc. However, in the event the actual taxable income differs from the projection and deferred tax assets should be amended, the business performance and financial position of the Group may be adversely affected. (17) Impairment accounting In case of recognizing loss on the Group s non-current assets due to lower operating capacity or profitability, a corresponding impairment loss would be recorded, and may adversely affect the business performance, financial position and management of the Toyo Seikan Group. (18) Change in accounting standards and tax system, etc. The Japanese accounting standard was amended several times to comply with international standards, and we expect this trend to continue. In addition, discussions are under way toward applying the International Financial Reporting Standards (IFRS) in Japan. Given such circumstances, future changes in accounting standards could affect the operating results, financial position and business execution of the Toyo Seikan Group. Any amendment of tax systems and other similar standards could also affect the Group in a similar way. (19) Hostile takeover Since the Company is publicly listed, there is a possibility that a bidder could attempt a takeover bid or acquire a large quantity of shares on the market. In the event of a hostile takeover that may impair the corporate value and common interest of shareholders, the business performance, financial position and management of the Toyo Seikan Group may be adversely affected. (20) Fluctuation in the value of assets The value of assets such as land and marketable securities could change, which may adversely affect the business performance and financial position of the Toyo Seikan Group. (21) Litigation risk The Group faces a risk of being sued in the course of doing business in Japan and overseas. In case of becoming the target of major litigation, the business performance and financial position of the Toyo Seikan Group may be significantly affected

16 Corporate Governance 1. Corporate Governance * Our fundamental philosophy of corporate governance The Group based on the fundamental philosophy of management policy, creed and vision, places the enhancement of corporate governance as management priority to improve the corporate value and continue new development and progress further, while contributing to society through its business activities. Accordingly, Basic Corporate Governance Policy has been established to address this issue on an ongoing basis. 1) Corporate Governance System (a) Overview of corporate governance system The Company has adopted the Audit and Supervisory Board system, and each Audit and Supervisory Board Member supervises the business duties executed by the Directors and oversees the Company s management. As of June 28, 2016, the date of submission of the Annual Security Report, the Board of Directors consisted of nine (9) Directors including four (4) outside Directors. The term of office for Directors is fixed at one year to clarify the management responsibilities of Directors, and flexibly construct a structure that can respond quickly to changes in the business environment. The Company may have no more than 15 Directors as determined by the Articles of Incorporation. The Audit and Supervisory Board is composed of five (5) Audit and Supervisory Board Members, including three (3) outside Audit and Supervisory Board Members. The Company has implemented the Executive Officer system with the aim of clearly distinguishing the management s decision-making and supervisory functions from the business execution functions. To appropriately and promptly establish basic management guidelines, determine various measures and aggressively promote management activities, Management Strategy Meeting is held once a month which comprises full-time Directors, CFO, CTO, Senior Executive Officers and Executive Officers. Furthermore, Management Executive Meeting is, in principle, held twice a month and attended by full-time Directors, CFO, CTO, Senior Executive Officers and the Presidents of major group companies. Standing Audit and Supervisory Board Members attend the Management Strategy Meeting and the Management Executive Meeting to express opinion as necessary. The Internal Audit Office (consisting of seven (7) members) has been established to strengthen the internal auditing system by ensuring strict compliance of all business activities with the rules and regulations and enhancing the management efficiency

17 The Company s corporate governance system is as follows: General Meeting of Shareholders Election and Dismissal Election and Dismissal Election and Dismissal Board of Directors Audit and Supervisory Board Audit Internal Audit Office Management Executive Meeting Management Strategy Meeting Representative Directors Group CSR Promotion Committee Group Compliance Promotion Committee Group Environment Committee Accounting Audit Accounting Auditor Executive Officers Respective Divisions Collaboration (b) Reason for the adoption of the corporate governance system The Company has adopted the current system because Audit and Supervisory Board Members including outside Audit and Supervisory Board Members sufficiently fulfill oversight functions on business duties executed by the Directors and the Company s business condition, and outside Directors sufficiently fulfill supervisory functions on the Company s management. (c) Matters concerning other corporate governance system Maintenance of internal control system The Company maintains a system (hereinafter the Internal Control System ) to ensure that all corporate activity complies with the Companies Act and the regulations enforceable under the Act as outlined below. I. System to ensure that the execution of duties by respective Directors and employees of the Company and each Group company complies with Japanese laws and regulations and the Articles of Incorporation 1. The Company shall formulate the Toyo Seikan Group Code of Conduct Charter, which shall apply to the Company and each Group company accordingly, and establish the Toyo Seikan Group Compliance Promotion Committee (hereinafter the Compliance Promotion Committee ) and the operational secretariat to streamline the Group-wide compliance structure and control compliance-related initiatives. 2. Under the guidance of the Compliance Promotion Committee, the Company and each Group company shall formulate their respective corporate codes of conduct as behavior guidelines for Directors, Executive Officers, employees and other personnel (collectively, hereinafter referred to as the Officers and Employees ) to address compliance with Japanese laws and regulations, the Articles of Incorporation and corporate ethics. At the same time, the Company and each Group company shall conduct training and education of their respective Officers and Employees to ensure that they thoroughly understand compliance issues

18 3. The Company and each Group company shall establish their respective compliance hotlines as a means for employees, etc., to directly provide information about questionable activity that might be illegal or otherwise non-compliant. The Company and each Group company shall also set rules for operating said hotline system and streamline the compliance-related reporting and consulting systems to prevent and/or early detect and correct non-compliance. II. System to retain and manage information regarding the execution of duties by respective Directors of the Company and each Group company In accordance with Japanese laws and regulations, and internal regulations, the Company and each Group company shall record and maintain all information regarding the execution of duties by Directors, including i) General Meeting of Shareholders meeting minutes, ii) Board of Directors meeting minutes, iii) management meeting minutes and iv) consultations and approvals, for a period of time set forth by regulations pertaining to such information and in an appropriate manner that it is accessible in either hard copy or electromagnetic media by Directors and Audit & Supervisory Board Members for examination. In addition, the Company and each Group company shall respectively formulate relevant regulations for information management to ensure appropriate information management. III. Regulations and other systems for controlling the risk of loss at the Company and each Group company 1. The Company shall formulate the basic policy regarding risk management of the Toyo Seikan Group. The Company and each Group company shall streamline their respective risk management systems accordingly. The Company shall also check the risk management status of respective Group companies through its management meetings to take necessary measures for improvement and correction. 2. In any unforeseen event or circumstances, the Company shall establish, as the need arises, a crisis management headquarters to control crisis management efforts at the Group companies, or each relevant Group company shall establish its own crisis management headquarters. Thus, the Company and each Group company shall put in place an emergency response structure to prevent or minimize further expansion of Group-wide damages. IV. System to ensure efficient execution of duties by respective Directors of the Company and each Group company 1. The Company shall stipulate matters to be resolved and reported at the Board of Directors meetings. In addition, the Board of Directors meetings of the Company shall be held once per month, in principle, and at other times, as needs dictate, to make appropriate and quick decisions with regard to Group-wide management policies and strategies, as well as important issues in relation to the execution of business operations. 2. The Company shall stipulate matters to be discussed and reported at the management meetings. In addition, the management meetings of the Company shall be held three times per month, in principle, and at other times, as appropriate, to discuss important issues relating to the execution of the business operations of the Company and each Group company to help the Board of Directors of the Company improve the efficiency and effectiveness of deliberations. Each Group company shall also establish management meetings, etc., in principle, to help its Board of Directors improve the efficiency and effectiveness of deliberations. 3. At the Company and each Group company, business operations based on the decisions regarding a course of action made by the Board of Directors shall be executed by each department in charge according to rules governing the division of duties, final decisions (kessai) and authority, which shall be stipulated by the Company or each Group company through prior consultation with the Company and shall be checked or rectified by Directors, as necessary. V. Other systems to ensure the appropriateness of operations at the Company and each Group company 1. As the holding company that controls the overall businesses of all the Group companies, the Company shall confirm and validate the scope of business, operating performance, etc., by holding regular meetings with each Group company. 2. The Company shall formulate the Group Companies Management Regulations and streamline systems to receive reports on business operations, etc., from each Group

19 company and provide it with business administration and support in the pursuit of seeking the appropriate management of each Group company. 3. The Internal Auditing Division of the Company shall audit the internal control systems at the Company and each Group company and report the audit results to the President. 4. The Company and each Group company shall streamline and operate appropriate internal management systems to ensure proper financial reporting in accordance with the Financial Instruments and Exchange Act and other applicable Japanese laws and regulations. VI. System of employees assigned to assist the duties of Audit and Supervisory Board Members, as well as matters for ensuring independence of said employees from Directors and the effectiveness of the directions given by Audit and Supervisory Board Members to said employees 1. Based on discussion with Audit and Supervisory Board Members on the required number of such assistants, Directors shall appoint the assistants to be engaged in carrying out the duties of Audit and Supervisory Board Members as dedicated employees necessary for requesting Audit and Supervisory Board to perform his/her professional duties. 2. The aforementioned assistants shall receive directions and orders only from the Audit and Supervisory Board in executing their duties and shall never receive any orders from Directors. Evaluations of assistants will be made by the relevant Audit and Supervisory Board Member, but the Directors, with the consent of the Audit and Supervisory Board, will carry out any appointments, dismissals, reassignments and/or revision of wages, etc., of such assistants. VII. System to report to Audit and Supervisory Board Members by Directors and employees, etc., of the Company and each Group company, as well as other systems for reporting to other Audit and Supervisory Board Members 1. The Officers and Employees shall make timely and appropriate reports to the Audit and Supervisory Board Members regarding important matters that might have an impact on business operations or performance through management meetings, etc. Despite the above, Audit and Supervisory Board Members may, whenever necessary, request reports from the Officers and Employees and attend important meetings on various business operations at the Company and each Group company. 2. The Internal Auditing Division of the Company shall regularly hold reporting sessions for Audit and Supervisory Board Members to report the current circumstances of the internal audits, compliance, risk management, etc., mainly at the Company and any relevant Group companies. 3. The Company and each Group company shall streamline their respective systems that allow the Officers and Employees to report compliance-related issues to any Audit and Supervisory Board Member. 4. The Company and each Group company shall ensure that anyone who has reported to Audit and Supervisory Board Member does not suffer from detrimental treatment for the reason of having made said report, and streamline the system to this end. VIII. Other systems to ensure the efficiency of audits by Audit and Supervisory Board Members 1. The Audit and Supervisory Board Members shall strive to continually fulfill and improve their professional duties by mutually exchanging information and ideas with the President, the Internal Auditing Division and Accounting Auditor. 2. When problems or issues arise in the operation or management of the Company s internal control system, the Audit and Supervisory Board Members may discuss with the Board of Directors and request measures to address those problems. 3. The Company and each Group company shall immediately treat expenses in their respective accounting procedures that have accrued in relation to the execution of duties by Audit and Supervisory Board Members, by taking into account the opinion of the relevant Audit and Supervisory Board Member, except as otherwise recognized that such expenses are not necessary for the execution of said Audit and Supervisory Board Member s duties